Why Bitcoin Won’t Die

Despite the headlines following Mt. Gox, Bitcoin is stronger and more resilient than it appears.

Bitcoin should be dead now following the hacking of the Mt. Gox exchange, Nicolas Colas, a managing director and chief market strategist at ConvergEx Group, told an audience at a presentation about the virtual currency hosted by the New York Society of Security Analysts on Wednesday. Instead of dying, the currency has bounced back, with its price increasing by more than $100 since it fell steeply after the collapse of Mt. Gox.

Although wide public acceptance has been elusive for Bitcoin, there is still enough demand for Bitcoin that not even the failure of Mt. Gox could dissuade that demand, Colas said.

“I thought we got to the point where Bitcoin was done after Mt. Gox, but its recovery since shows how durable it is. It’s a strong signal of the demand to own and transact in Bitcoins. [The demand] is global, so it doesn’t depend on the U.S. news cycle,” he explained. “At the end of the day, you have to respect that [high] price.”

Bitcoin has several strengths related to its anonymity and ease-of-transfer that have fed its global demand and kept it strong. That strong demand -- and the fact that Bitcoin’s systems involved in creating the currency are extremely secure -- means that Bitcoin is here to stay, Colas noted in his presentation. And the currency could really take off in the future if regulators figure out how to treat the currency and a more secure way of trading the currency is found, he added.

Bitcoin’s usefulness for international payments is one of the sources of its allure, according to Colas. He called Bitcoin “the best way that has been found so far to send international payments.”

“If I wanted to send 10 Bitcoins to someone [overseas], they would have it in ten minutes, and it would be almost free. Try getting that at Western Union,” he remarked.

And the anonymity that Bitcoin offers is more meaningful to individuals in some other countries than it is in the U.S. The price of Bitcoin got a big bump last year after China started accepting Bitcoins. “That anonymity has been a big selling point in China,” Colas observed.

Another reason for the currency’s staying power -- strange as it might sound given recent events -- is security, Colas added. Bitcoin exchanges and wallets have been hacked multiple times in the past, but Bitcoin’s central infrastructure for creating new Bitcoins has never been hacked. And that should give people confidence that the currency isn’t going away any time soon, Colas suggested.

“There are enough prideful people in the IT world who would love to hack Bitocin to [claim that they shut down Bitcoin], but no one has done it yet,” he commented.

Colas also outlined steps that could lead to wider recognition and acceptance of Bitcoin, beginning with the need to regulate it. “For Bitcoin to come out of the cold, Know Your Customer and Anti-Money Laundering regulations will have to apply to it,” he stated. “Some regulator is going to have to step up and say, ‘This is how KYC and AML is going to be applied to Bitcoin.’”

It shouldn’t be hard for regulators to find a way to regulate Bitcoin, despite the concerns that its anonymity could help mask drug transactions and other illegal activities, Colas added.

“The issue is really in terrorist financing and drug trafficking. But if you think about it, if you go to a Mexican drug lord and offer to pay him in Bitcoins, he’ll probably have you shot,” Colas joked. “So at a high level, I don’t see Bitcoin becoming the main currency for illegal transactions.”

Additionally Bitcoin would need some sort of clearing house for it to be accepted as a security by the trading community, Colas noted. The Winklevoss twins of Facebook and The Social Network fame are said to be working on a clearing house-like mechanism for Bitcoin trading. But with so many exchanges falling victim to hackers, now might be too early in the maturation of Bitcoin to build a clearing house. If the clearing house were hacked it would be another big setback for the currency, Colas pointed out.

But with Bitcoin’s usefulness for international payments, and the security of its central infrastructure, it will probably gain more public trust over time as it proves its resiliency, Colas said. Comparing Bitcoin to gold, Colas observed that Bitcoin still has to prove its durability over time to the wider public in a way that people can relate to their own lives. “Gold has been around for thousands of years and has been proved as a store-of-value through war, pestilence, and other catastrophes. Bitcoin hasn’t gone through that yet… but maybe one day we will have these stories about people putting their kids through college with Bitcoins.”

Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio

The Gold Standard always works, because it acts as a check for government spending and forces governments to spend within their means. The reason governments by and large went off the gold standard is because they wanted an "elastic" money supply to fund their endless wars, massive bloated welfare programs and other misguided things governments fund. The financial crisis of 2007-08 would not have occured if we had the Gold Standard, because banks would have been more prudent and not made reckless loans and speculative bets had there not been a central bank in place to print money at will and bail them out.

The Gold Standard didn't work for the Brits during the 1930's. It can really kill a country's exports. Every store-of-value (gold, silver, U.S. currency, Bitcoins) has its risks and rewards. And they all fluctuate in value a great deal over time. There's not really as much separating them as is sometimes made out to be. The difference with Bitcoin is that it's so new and we're so early on the maturity curve. So there are things -- like building a secure trading infrastructure -- that still need to be figured out.

A lot of that mocking of Bitcoin also has to do with its attractiveness to criminals and drug dealers. But people tend to forget that the U.S. $100 bill is the store-of-value of choice of the international drug trade. Cash gives just as much anonymity as Bitcoin.